There are times when you might see worth in buying an existing business. You might find the prospective promising and profiting. This is the time when due diligence should start with accessing the records and books of that business. You receive a suitable time to investigate various facts and figures, which will give you a genuine picture of its performance and prospects. It will also present you with the points / issues / problems / loopholes that would require prior warranties or guarantees, before the signing of contract.

Due Diligence

If you are new in purchasing existing but working businesses, then you should educate yourself on the elementary three categories of due diligence that are to be followed, without fail. Also, you might want to hire separate adviser for each of the due diligence that are mentioned below:

Commercial Due Diligence: It includes assessing the credibility of the business in the market, evaluating its competitors and determining the regulatory environment.

Financial Due Diligence: It comprises gauging and comparing the numbers to ensure that there are no loop holes / black holes or hidden monetary matters

Legal Due Diligence: When you venture into a contract of sale &amp; purchase, lawyers should judge the legal title of business to sell. Lawyers should also appraise ownership of every asset along with ensuring that all the litigation and regulation issues are completely addressed.

When to Start Due Diligence?

First agree on a price and terms with the selling business, then begin the due diligence process. There is possibility that they might withdraw their business from the market during your enquiry. This period is called “exclusivity period” and for this the seller generally demands a down payment to ascertain its security. In most cases, this period spans to minimum three to four weeks. Remember that this investigation period is passable.

Where to Get Help From?

One of the most standard and common method of due diligence is to employ solicitors and accountants on your payroll. They will classify the risk zones for you. However, in case the Existing Business which you are buying, is registered with Companies House, you can get hold of reproductions of its accounts, annual returns and various other important documents with the prospect business. For this, you can use the Companies House WebCHeck service.

You can download the documents from the website of Companies House. Note that there might be a small fee for this facility of evaluating the businesses value along with its assets.

What Points to Examine During Due Diligence?

You must understand the it’s just not about finances; due diligence spans across this one important factor. The “exclusivity period” should end with positive results, yielding all-inclusive information about the business and concerning prospects. You should know exactly what you are buying; what will need your immediate attention; what should be fixed; what will be cost of correcting the negative aspects / risks; and lastly whether their business is a right investment for you or not.

In other words, at the end of “exclusivity period”, you must have the answer to whether The Existing Business Is Worth Buying. Due Diligence should cover following points:

Commercial Management that should include marketing, client service, research and development:

Issues related to environment
IT Systems and other technologies
Foremost orders and contracts
Unsettled litigation
Terms and conditions of employment
Information Sources

When carrying out due diligence, make sure to go to depths and find every possible information regarding the business. The information can be unearthed in the form or documents or other ways. You must find out:

Employment Contracts
Payroll Records
Staff Files
Staff Manual

In some cases, following copies might also be relevant:

Financial Statements
Pension and Profit-Sharing Plans
Union Contracts

Rest, you should also contact bank, government taxation department and other external sources. You can also contact any good due diligence company for due diligence investigation services.

Bill Trueman a highly experienced specialist in risk review and due diligence has been providing Due Diligence Services since years. He is permanent member of AIRFA, and director of RiskSkill and UKFraud.

The entire world is globalized and the new era presents a series of challenges in every domain, including doing business with overseas companies. It has become the need of the hour to implement an approach, which is streamlined, efficient in all the resources and sustainable as well. Through this approach, the third party risks can be mitigated, compliance can be supervised, and issues as well as investigations can be managed more efficiently.

Precis

Expansion of business always brings revenues but it also opens up a window to new risks through third-party relationships that may be with a distributor, supplier, lawyer or even a client. Some common types of risks which they bring are related to IT security, environmental, quality, regulatory compliance, corruption, health and safety. Most of the general risks can be assessed and dealt with by the business / company itself. However, with third-party deals there is always extra scope of risks that can only be minimized through due diligence.

The Catch

If the risks are not identified and mitigated at early stage, they can convert into an avalanche and sabotage the company’s reputation as well as profitability. Adding salt to the wound, in case the fault is of third-party, the original company who made a deal with it, will be held responsible. Hence, one side of coin has progress & growth of their business, the other side has a lot of risks associated with it.

The Solution

“Due Diligence” it the pathway not only to mitigate third-party risks but also to inspect compliance, carry out assessments related to due diligence, finding of gaps that might convert into risk / compliance violation and proactively remediate the found issues. And this is where the role of due diligence firms arises which provides commercial due diligence services globally. If you are planning to buy any firm then you may need their help to save your time and money.

Key Instances of Third-Party Violation

In 2009, there was a case in Dallas where a healthcare provider caught its contract security guard for hacking into various computers, which comprised the systems on which the confidential data of the patients was stored

In 2011, a UK based international insurance intermediary was fined by FSA as it failed its anti-bribery and corruption systems controls.

In 2012, a third-party contractor was found in violation of most of the rules regarding labor and working conditions in its factories that brought unwanted negative publicity to the top technology manufacturing companies.

Mitigating Third-Party Risks with Due Diligence

There are a series of fragmented approaches being followed by companies based globally in order to develop effective systems that will manage the compliance of third-party risks. Still the companies tend to fall short of a fool-proof system for mitigating the third-party risks. Some companies find themselves between a rock and a hard place concerning the constant changes. Whereas there are few companies, who focus only on managing the third-party. Hence, the companies fail on the ethical aspects such as bribery, regulatory violations, security breaches, money laundering and others.

In such situation, a comprehensive framework is required that will assist in 100% third-party due diligence. Important factors in this regard are:

Audits

Controls

Investigations

Risk Assessments

Policies

Timely Issue Remediation

Training Programs

If such a strong and comprehensive framework is made and implemented, then not only the the third-party risks will be mitigated, but the companies will be able to forge more credibility in the international arena.

Challenges Related to Third-Party Business Deals

1) The third-party network can be quite complicated. Since they cannot be managed directly like permanent employees of a company, an indirect approach is followed for the management purposes. This makes it very difficult for the main businesses.

2) Redundancies can be seen in case a specific third-party is managed by more than one departments of a business. Duplicate and double efforts are common in this case.

3) High cost are always present that cause the businesses to ignore the due diligence after the deal is made.

4) Regulatory compliance

5) Restricted transparency and huge volume of data to be processed

Highlights of Mitigating Third-Party Risks by Strengthening Due Diligence

The companies or businesses should make a blueprint of schemes or procedures that they need to implement so that risks are reduced to minimum.

1) Take enough time: Businesses should take enough time to conduct background checks on each and every third-party. They should NEVER be casual within even one parameter, as it can lead to unforeseen risks and credibility issues.

2) Conduct comprehensive risk assessment: Companies should consider the country, regions, international laws & regulations, labor issues & guidelines and other related factors will assessing the risks associated with an international third-party deal.

3) Create your own policies and code of conduct rules and make sure to communicate these completely to the third parties. This keeps both the parties on same level and improves the understanding amidst them.

4) Due diligent should be performed without fail for Mitigating Third-Party Risks, especially in the cross border deal.

Authors of this post are Bill Trueman is an eminent payment, due diligence, risk & fraud expert who provide his consultancy services to card issuers, banks, corporates and business organizations all over the world. He is chief executives of RiskSkill, UKFraud and member of AIRFA.

Whenever someone makes a contract with an organization, there are definite chances of frauds, either very less or very high. However, the organizations always claim to have utmost transparency. As an investor / consumer, you should be aware of the fact that there no thing as 100% transparency or 100% fraud proof contract in any domain. Even though cheating some other party intentionally is considered as criminal offense under law, still frauds are prevalent, if not more than definitely on the small scale.

Commercial frauds are something, which have even caught the attention of the UN that has termed it among the present era’s supreme coercions. They have acknowledged commercial frauds as an international level event that harms the stability of the economics of every country. And this is where the role of due diligence consulting services starts. There are many due diligence companies which you can take help of.

General Commercial Frauds: These are related to activities like Deceptive Advertising or Marketing, False Reporting, Falsifying Documents, Non-Delivery, Piracy, Overriding of Regulatory Breaches and Thefts.

Popular Scandals: Deutsche Morgan Grenfell in England and Enron in the U.S.

Be Cautious in International Contracts

If you plan to get into an agreement, then it is recommended to audit the other contracting party for the relevant matters such as financial records, past complaints / clients etc. This step is very crucial during the negotiations stage and should be continued even after the end of negotiations. This small step will help to minimize your financial loss and prevent from getting into any legal trouble.

Few relevant matters of investigation are:

1. Government rules and regulations of each nation
2. Indemnities, loans and other financial arrangements
3. Information technology such as security of system, upgrades etc.
4. Language or cultural obstructions
5. Potential in the market and prospects of future performance

Stay Safe from Frauds in International Contracts

With every passing year, new fraud surface either at large level or at small. It is only by being self-conscious that you can protect yourself / your company / your investment from fraud in the international contracts. Also, below are some pointers that will guide you in safeguarding yourself from the fraudsters:

Specialization is necessary. You can take assistance of lawyers or consultants, who specialize not just in the international contracts but also in the domain wherein you are dealing in. This is very beneficial if you are not an expert yourself. In addition, you can spend your money in acquiring marketing and accounting specialization.

Use Secure Payment Methods and Letter of Credit. Whether you are dealing with a known entity or not, you should still take all possible precautions to draft clear and secure terms. In the banking industry, there are strong terms for “Letters of Credit” that come with the bank’s guarantee for partial payment or seller’s payment on behalf of buyers. Although the risk is not entirely eliminated, but these can be instrumental for novice traders in mitigating the chances of fraud.

Mention Important Clauses in Contracts. In the international contracts, frauds can be avoided or their chances reduced by the inclusion of important points that can be called negotiating requirements, for instance certification, currency, product samples, insurance, and other regulatory documentation.

Authors of this post are Bill Trueman and Kevin Smith who are eminent payment, due diligence specialists, risk & fraud expert who provide their consultancy services to card issuers, banks, corporates and business organizations worldwide. They are chief executives of RiskSkill, UKFraud and member of AIRFA which is a worldwide known independent organization.